PMI Identifies Risky Housing Markets
PMI Mortgage Insurance Co., a subsidiary of The PMI Group Inc., Walnut Creek, Calif., has released its Summer 2007 U.S. Market Risk Index which ranks the nation's 50 largest metropolitan statistical areas according to the likelihood that home prices will be lower in two years. The index shows a risk of price drops in Florida and California, as well as certain areas of the Southwest.
According to PMI, "Between slowing appreciation, falling demand and layoffs in the construction industry, we began to see a change in the housing market by early 2006. The contraction of the subprime lending industry in early 2007 added momentum to the transition, and today we are in a vastly different market than we were even as recently as a year ago."
As a result, the index was upgraded to give additional weight to an area's recent price volatility. For the 50 largest MSAs, the average score, weighted by population, was 346, translating into a 34.6% chance that prices will be lower in two years.
"We're very pleased to introduce our updated Risk Index model," said Mark F. Milner, chief risk officer of PMI Mortgage Insurance Co. "Our new model gives more weight to the recent volatility of an area's price movements and is better suited for the vastly different market we are in today. Our prior model, in contrast, was tuned to the rapidly appreciating market we were in from 2002 to 2006."
An additional feature of the enhanced index is the introduction of risk ranks, which groups areas with consistent characteristics together. Riverside, Calif.; Phoenix; Las Vegas; and West Palm Beach, Fla., rank highest on the index, with a 60% or greater chance that home prices will be lower in two years. Five of the 11 MSAs facing a greater than 50% chance of a price decline are in California - Los Angeles, Santa Ana, Oakland, Sacramento and San Diego -- and four are in Florida - Orlando, Fort Lauderdale, Miami and Tampa. The other two are Boston and Washington, D.C. MSAs in Texas, Ohio, Indiana and Pennsylvania constitute the lowest ranked group, those facing a less than 10% chance of lower prices.
"What the markets with the greatest risk of decline have in common is a history of price volatility, rapidly rising rates of price appreciation above the long-term average followed by a recent sharp slowdown in the rate of appreciation," Mr. Milner said. "Markets with a history of volatility are more likely to see price declines in the future. MSAs with a history of low to moderate rates of volatility in house price appreciation have a lower risk of price declines."
Citing information from the Office of Federal Housing Enterprise Oversight, PMI reports the rate of price appreciation slowed in all but five of the 50 largest MSAs, with only five seeing double-digit price appreciation in the first quarter of 2007 - Idaho, Montana, Utah, Washington and Wyoming. This is down from 26 MSAs demonstrating double-digit price appreciation in the first quarter of 2006. Nine MSAs - West Palm Beach, Fla.; Oakland, Calif; Sacramento, Calif.; San Diego; Boston; Cambridge, Mass.; Cleveland; Detroit and neighboring Warren, Mich. - saw slight year-over-year price declines. In most areas, the risk of price declines continues to be balanced by strong economic fundamentals, including low unemployment.
"The market's changing tide doesn't mean it is a bad time to buy or own a house, but it is a reminder that homeownership is a long-term investment," noted Mr. Milner.
"For buyers, in many areas it's a much friendlier market than it was even a year ago, but you need to choose your mortgage product carefully. If you already own, you need to take the long view and have realistic expectations about how much your property may appreciate."
Snapshot: Nation's Riskiest Housing Markets
Metro Area Risk Score
Riverside-San Bernardino, CA 652
Phoenix-Mesa-Scottsdale, AZ 646
Las Vegas-Paradise, NV 614
West Palm Beach, FL 607
Los Angeles-Long Beach-Glendale, CA 586
Source: PMI. Note: Scale ranges one to 1,000, with risk rising as the score rises. A score of 600 indicates a 60% chance that home prices will be lower in two years. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/